Given the pressing need for labour market reforms in Europe, policymakers are looking to the Hartz I-IV reforms conducted in Germany in the mid-2000s for inspiration. To successfully apply their lessons one must understand why they worked. This column argues that the success of the Hartz reforms lay in improving matching efficiency between unemployed workers and vacancies – particularly effective in Germany where employment inflows are the main driver of labour market adjustment, in contrast to the US, where outflows play the primary role.

In a slow-growth, high-unemployment continent, Germany’s performance stands out. The success is often ascribed to the politically difficult Hartz labour-market reforms. This column discusses evidence to the contrary. The Hartz reforms played no essential role. Rather, the key was the threat of offshoring to central Europe together with the pre-Hartz structure and autonomy of the German labour-market institutions. This structure allowed trade unions to make wage concessions necessary to adapt to the new realities. Other nations should decentralise bargaining to the firm level while keeping workers’ representatives.